ARM Cement boss gets Sh1bn shares in staff reward plan

ARM CEMENT CEO PRADEEP PAUNRANA. FILE PHOTO | NMG  

By VICTOR JUMA

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Summary

• Mr Paunrana’s entitlements, alongside that of deputy CEO Surendra Bhatia, who is lined up to receive a total of 14.1 million shares worth Sh179 million, are disclosed in documents issued in relation to the company’s disposal of its non-cement business.
• The 86.5 million shares allocation to Mr Paunrana comes after ARM issued 111 million shares for its Esop in 2016.
• The duo is allotted shares upon meeting unspecified performance targets.

Cement maker ARM’s chief executive, Pradeep Paunrana, is set to take up shares of the company currently worth Sh1 billion as part of his stock-based compensation, making him the largest beneficiary of the firm’s employee share option plan (Esop).

Mr Paunrana’s entitlements, alongside that of deputy CEO Surendra Bhatia, who is lined up to receive a total of 14.1 million shares worth Sh179 million, are disclosed in documents issued in relation to the company’s disposal of its non-cement business.

“Pradipkumar Harjivandas Paunrana has a beneficial interest in ARM shares through 31,529,100 units issued to him under the ARM Esop and 55,000,000 Esop units capable of being issued to him subject to the company achieving various targets in relation to its financial performance,” the cement manufacturer says in official documents.

The 86.5 million shares allocation to Mr Paunrana comes after ARM issued 111 million shares for its Esop in 2016.

The two executives are headed to take up 90 per cent of the new stock.

The duo is allotted shares upon meeting unspecified performance targets. They have already been issued with part of the stock.

Mr Bhatia has received 9.1 million shares and could get an additional five million units, the company added.

The size of Mr Paunrana’s stock-based compensation ranks among the largest for a CEO of a Nairobi Securities Exchange (NSE)-listed firm, joining a rarefied group led by Equity Group’s chief executive, James Mwangi, who holds some 28 million shares currently worth Sh1.2 billion in the lender’s Esop.

Stock issued to executives, usually for free, has the potential to make a fortune for the individuals, especially if there is a strong rally in the company’s share price.

The ARM documents show that Mr Paunrana has a beneficial interest in 218.6 million shares, valuing his total stake in the company at Sh2.7 billion.

READ: Paunranas lose Sh17bn ARM wealth in 3 years

The market value of the shares has dropped sharply from August 2014 when it stood at nearly Sh20 billion, with the firm’s share price having declined 86 per cent since then to trade at Sh12.7.

Though used by relatively fewer NSE-listed firms, stock-based compensation schemes gained traction from the early 2000s as a means of aligning the interests of employees with those of shareholders.

By owning stock in their company, workers, including executives, are exposed to the upside and downside of their performance and decisions. Issuing shares also helps companies to use less cash in remunerating their top executives.

Accounting for stock-based compensation has, however, generated a lot of controversy, especially in the developed world where its usage is more widespread.

Many companies with Esops fail to declare the shares issued as an expense though they dilute ordinary shareholders’ future earnings. By ignoring the cost of Esops, companies are able to report higher absolute earnings.

ARM did not specify the performance targets its executives must hit before they are allotted shares. The vesting period — the time an employee must wait before taking up shares in the scheme — is also not disclosed.

The company is, however, in multi-year losses and is betting on new capital and asset sales to repair its debt-riddled balance sheet.

ARM’s borrowings peaked at Sh24.3 billion in 2015 when it reported a net loss of Sh2.8 billion, breaking 14 years of relentless profit growth that culminated in peak earnings of Sh1.4 billion in 2014.

The loss, which ushered in an era of negative earnings, exacerbated the company’s debt problem that saw it raise Sh14 billion from UK sovereign wealth fund CDC Group which was allotted a 42 per cent stake.

ARM reported a net loss of Sh1.4 billion in the half year ended June 2017, widening 5.3 times from Sh266.7 million a year earlier.

CDC’s cash injection has proved insufficient to turn around the company’s fortunes and the cement manufacturer has announced asset sales and new dilutive capital-raising plans.

ARM expects to raise at least Sh1.6 billion from the sale of its non-cement business.

READ: ARM’s Paunrana family to buy non-cement business

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